Other Author Felicia Chan, Trainee Solicitor, Hong Kong
On 4 November 2021, the High Court of Australia heard the arguments put forward by Wells Fargo Trust Company, National Association and Willis Lease Finance Corporation, together Wells Fargo, and the administrators (the Administrators) of the Virgin Australia Airlines group, which entered into administration on 20 April 2020. The dispute primarily concerned who should pay for the redelivery of four aircraft engines capable of being used on B737s (the Engines) to the lease redelivery location in Florida. The Engines were legally owned by Wells Fargo Trust Company and beneficially owned by Willis Lease Finance Corporation, were on lease to VB Leaseco Pty Ltd., and were subleased to Virgin Australia Airlines Pty Ltd.
Cape Town Convention
The case relates to the Convention on International Interests in Mobile Equipment (the Cape Town Convention) and the Protocol to the Cape Town Convention (the Cape Town Protocol), as adopted in Australia by the International Interests in Mobile Equipment (Cape Town Convention) Act 2013 (Cth). Wells Fargo Trust Company, National Association held registered "international interests" in respect of the Engines for the benefit of Willis Lease Finance Corporation.
The key provision in dispute was Article XI(2) of the Cape Town Protocol, which provides that upon the occurrence of an insolvency-related event (which it had been agreed includes the administration of the Virgin Australia Airlines group), the insolvency administrator shall give possession of the aircraft object to the creditor.
Other Relevant Law
Section 443B of the Corporations Act 2001 (Cth) provides that an administrator may give a notice to the owner/lessor of property leased by the company that specifies the property and states that the company does not propose to exercise rights in relation to the property (a Section 443B Notice). The Administrators had provided a Section 443B Notice to Wells Fargo alongside email correspondence, which stated that the Administrators did not wish to exercise rights in relation to the Engines and that it was the Administrators' intention to discuss and agree an orderly handback arrangement of the Engines, with removal and delivery of the Engines being at Wells Fargo's cost.
This dispute has already been heard in two courts in Australia, which each came to a different conclusion.
The court of first instance, the Federal Court, decided that "give possession" under Article XI(2) required physical delivery of the Engines in line with the redelivery arrangements in the underlying lease agreements. This meant the Administrators would have to pay for the return of the Engines to Florida in compliance with the return conditions in the lease agreements. The Court said that if there were no lease agreements, or if those that existed did not cover repossession, then the normal principles of contract – including those relating to the implication of terms and duty to act in good faith - would apply. This decision was appealed by the Administrators.
On appeal, the Federal Court of Australia decided that the effect of Article XI(5) of the Cape Town Protocol (which includes the words, "[u]nless and until the creditor is given the opportunity to take possession under paragraph 2…") was that "give possession" did not mean effecting redelivery in accordance with the lease agreement but simply that the Administrators were required to offer to Wells Fargo the opportunity to take possession, resulting in Wells Fargo having to pay for the return of the Engines to Florida.
This decision was then appealed by Wells Fargo and special leave to appeal to the High Court of Australia was granted.
The Arguments before the High Court
On 4 November 2021, arguments of a very technical legal nature, concerning the construction and interpretation of various provisions of the Cape Town Protocol and the ultimate meaning of "give possession" were put forward by Wells Fargo and the Administrators. A short summary of the overarching position of each of the parties is set out below.
Wells Fargo argued that they were entitled to the self-help remedy available under Article XI(2) of the Cape Town Protocol to retrieve the Engines, which required the giving of physical possession and not just the opportunity to take possession. The intention of the Cape Town Convention and Cape Town Protocol was to give priority to commercial agreements and ultimately reduce the risk to secured creditors with registered international interests (even where that may come at a cost to other creditors). Furthermore, since there was no suggestion that the redelivery provisions in the lease were unreasonable, Wells Fargo could rely on Article IX(3) (which deemed the exercise of a remedy to be in a commercially reasonable manner if it is exercised in accordance with a provision of the agreement, unless such a provision is manifestly unreasonable) to exercise its remedies under the lease agreements. On this basis, Wells Fargo argued that, in order to "give possession" in accordance with the Cape Town Convention, the Administrators must redeliver the Engines to Wells Fargo (i) at the redelivery location in Florida, and (ii) in the condition required by the relevant lease agreement.
In response, the Administrators' position was "give possession" in Article XI(2) did not require the Administrators to physically return the Engines and it was sufficient for the Administrators to notify Wells Fargo that the Administrators had disclaimed control over the Engines. The Administrators considered that the Section 443B Notice and the associated correspondence satisfied the requirement to disclaim control.
The Administrators argued that the Cape Town Convention did not oblige the Administrators to redeliver the Engines in accordance with the terms of the relevant lease agreement; while the Cape Town Convention provided to a creditor the right to "take possession" upon a default, it did not entitle a creditor to use the Cape Town Convention to require compliance with the terms of the underlying lease agreement. Once possession of the Engines was ceded to Wells Fargo, any enforcement of remedies in the relevant lease agreement would fall outside the Cape Town Convention and require enforcement in accordance with domestic law. The exception to this general rule is the Cape Town Convention requirement (in Article IX(3) of the Protocol) that a creditor must enforce its remedies "in a commercially reasonable manner".
In support of its arguments, the Administrators suggested that requiring the Administrators to redeliver the Engines in accordance with the terms of the relevant lease agreements would require funds from the insolvent estate and prioritise creditors holding international interests, which was not the correct construction of Article XI(13) (perhaps implicitly suggesting that such an approach might frustrate the objectives of domestic insolvency legislation).
Following the hearing in November, the High Court reserved its decision on the matter. We will publish a further update on this decision and the consequences of it, once the judgment has been handed down. In the meantime, please reach out to Richard Stock and Barry Cosgrave, if you would like to discuss this case or other aspects of the Virgin Australia administration.